Chinese Play for Fortescue Keeps Iron Man Standing
Beijing has a strategic interest in keeping marginal producers alive
The world’s iron-ore glut has a reliable friend in China’s state-run industrial complex.
Shares in Fortescue Metals, the largest pure-play miner of iron ore in the world, jumped nearly 11% Tuesday on an Australian Financial Review report that Chinese companies are fishing for ore assets. China’s largest publicly traded steel producer, Baoshan Iron and Steel—also known as Baosteel—and Citic, the country’s largest conglomerate, are names in the mix. Fortescue could use some fresh investment to ease its heavy debt burden.
Baosteel led a consortium last year to buy Australia’s Aquila Resources for more than $1 billion. And last month, smaller producer Shandong Iron and Steel bought Sierra Leone’s Tonkolili mine. This was the world’s largest iron-ore mine to be shut down during the current bust, notes Citigroup’s Ivan Szpakowski. Its new owners will likely want to restart production.
This isn’t just a case of buyers snapping up assets at low prices. As the world’s biggest iron-ore consumer, China has a strategic interest in sustaining marginal producers that can keep the commodity in oversupply. Beijing is already boosting iron-ore supply by keeping some of its high-cost local mines operating. And no international mine fully owned by China Inc. has so far closed, noted CLSA last month.
They likely won’t close in the near future either. Chalk it up to Beijing’s fear that the old iron-ore pricing arrangements—where the likes of Rio Tinto set high, long-term prices that Chinese steel mills had to eat—could return.
So long as the marginal guys stay in business, even momentary rises in prices will be self-defeating. Partly because of an iron-ore rally that began in mid-April, junior Australian producer Atlas Iron restarted mines that it had shut down earlier in the month.
With China flashing its willingness to keep mines open, the age of cheap iron will be a long one.